Saturday, January 28, 2012

Life Insurance

A long time ago for a very short time I was an insurance salesman. On the positive side, my sales always stayed ahead of my draw. I even received a few paychecks after quitting. In those few months I learned I am not a salesman. I don’t have a salesman’s bone in my body. In fact, if anything, I am the anti-salesman. When salesmen have to deal with me they run screaming into the night. During those days, insurance salesmen had a saying, “Sell term, don’t eat. Sell whole life, don’t sleep.” The meaning of this saying is rooted in the company’s commission structure. If a product is better for the corporation than it is for the client it will invariably pay a higher commission. A salesman with the best interest of his clients in his heart would be a very hungry salesman.

I have not made a study of the insurance industry as I have topics like value investing so I am not claiming to be an expert. However, I do have an opinion based on personal experience and readings from other personal finance teachers. Given that caveat, I believe there is only one reason to carry life insurance, minor children. If you have minor children, carrying life insurance is a part of being a responsible parent. Whole life is a waste of money. Term life gives the most coverage for the least money. Remember, you are buying insurance here not some sort of a second rate disguised investment program. There are far better things you can do with your investment dollars, than buy an insurance salesman a new vacation home.

How much? The number I have heard is $250,000 per minor child on the life of the primary breadwinner. The secondary income/homemaker should also carry some insurance, but much less, perhaps enough to pay for daycare and some other services in his/her absence. Personally, I like the idea of level term for a period of twenty years. That is about how long your children ought to be hanging around your house. However, in these days of the boomerang child and education creep that seems to require a Master’s degree for a good job, perhaps you ought to consider 30 year term. Again, personally, I like the idea of a fixed premium rather than a premium that increases over the life of the policy. I would suggest making the buy before the birth of your first child. I would consider buying enough for the number of children you plan to have rather than just that first child. You will get a better rate at a younger age. Also, buying more insurance at one time will give you a better rate than buying separate policies.

The Internet has greatly facilitated the purchase of products like term insurance. You no longer are faced with the prospect of an invasion of your home by a series of commission salesmen in order to get a few quotes on a term life policy. You can now collect all that information in the privacy of your own home. This would include the financial viability of the insurance company. You don’t want to buy a policy from the Texas Terror Insurance Company with a Standard and Poor’s rating of D.

In the interest of openness, let me state that I have no children but I carry term insurance offered by my employer in an amount roughly equal to my annual salary. When I first started work over 26 years ago, we had a net worth of about $2,000. I thought it would be nice to give my wife a year to get her head together, if I unexpectedly died. The insurance is inexpensive, really an employee benefit, so I have never cancelled the policy. When I retire, the rate will take a big jump, so I will not elect to continue that coverage.

Friday, January 27, 2012

Please! Please! Please!

I have been reading about the disturbing growth in the divide between rich and poor America. It is not only a divide between the important financial indicators (income and net worth). It is also a growing cultural divide. We are living in two different countries. Our children are growing up in two different countries. Charles Hugh Smith in the oftwominds blog uses the Pareto Principle to define the separation between the top 20%, most of these people are the professional and managerial class that does the “heavy lifting” for the top 1% who understand and therefore control a disproportion amount of capital, and the bottom 80%. From Who Rules America by G. William Domhoff. “In the United States, wealth is highly concentrated in a relatively few hands. As of 2007, the top 1% of households (the upper class) owned 34.6% of all privately held wealth, and the next 19% (the managerial, professional, and small business stratum) had 50.5%.”

If I could put on a performance like James Brown, the Godfather of Soul, I would be singing, “Please! Please! Please!” Believe me when I say the stuff that I write about in this blog works. It will work for you no matter where you fall along the net worth or income distribution curve. It will work if you are a Christian, a Buddhist, or an atheist.

Spend less than you earn.
Save enough money to handle unexpected expenses.
Stay out of debt.
If you find yourself in debt, get out of debt.
Then start investing your surplus.

It won’t happen in a day, or a month, or even a year. But I promise you, if you keep your hand on the throttle and your eyes on the rail, in a decade you will not believe how far you have traveled.

Charles Hugh Smith observes, “The divide extends to money management: the high-caste class is deeply interested in investments and view high-earning investments as signifiers of status while the working class only see the spectrum of consumption.” If you focus on buying stuff, you will have a low net worth even if you earn a significant income. The number of mc-mansions that have gone into foreclosure in this area are proof of this truth. Likewise, there are examples of families with minimal incomes who have accumulated surprisingly large amounts of money.

An interesting observation Smith and others (including yours truly) have made involves the new media technology. The top 20% own the same smart phones as the bottom 80% but they use them differently. The top 20% use these devices to facilitate their job and to collect information. The 80% are, according to Smith “voracious consumers of all media and entertainment.” They see the constant use of Facebook, text messaging, and the latest films on bootleg DVDs as signifiers of status.

If you don’t like your financial condition, do something about it. Turn off the TV and start reading books by people like Dave Ramsey or Suze Orman, or even the Silver Eagle Experiment. Change your behavior and change your life. You can do it. It will be a blessing to you, your children, and to your children’s children.

Background material from Wikipedia:

“The Pareto principle (also known as the 80–20 rule, the law of the vital few, and the principle of factor sparsity) states that, for many events, roughly 80% of the effects come from 20% of the causes.
Business-management consultant Joseph M. Juran suggested the principle and named it after Italian economist Vilfredo Pareto, who observed in 1906 that 80% of the land in Italy was owned by 20% of the population; he developed the principle by observing that 20% of the pea pods in his garden contained 80% of the peas.”

Sunday, January 22, 2012

What's Next?

Technology as well as phases in our lives tends to move in S curves. We start out slow. The Wright Brothers Flyer had a top speed of 30mph. It took six years before the Bleriot VI moved the bar to 47 mph. Then things started improving rapidly. In less than ten years WWI aircraft could fly at over 200 mph. In the 1930s all metal monoplanes broke the 400 mph barrier. However, that was just about the end for piston engine, propeller driven aircraft. Certain hotrod versions of WWII fighter planes cracked 500 mph, but they were not practical aircraft. It took a new technology, the jet engine, to start the curve over at a new higher level. Now it seems the practical limits of jet aircraft is about Mach 2.5. Yes, I know about the Mach 3 SR-71, but the Air Force has retired those incredible machines. They just aren’t cost effective when compared to satellite technology.

Likewise, as we start a new phase in our lives or learn a new skill, it takes some time to master the basics. Then once we understand the fundamental principles, our proficiency increases very quickly, until we finally begin to push against the inherent limits found in that body of knowledge. We begin to stagnate, relearning the same lessons over and over again. Finally, if we are lucky, sometimes we will once again begin the learning process anew, sometimes at another level. Some call this process, “the learning curve.”

I learned to fear and avoid debt, at my mother’s knee. That skill set has served me well. For most purchases, I successfully used the save and pay cash method. When I needed to take out a mortgage in order to buy a home, I paid it down as fast as possible. Avoiding debt and learning to live on less than I earn has served me well, but it wasn’t enough to take me to the next level. So, I set out to learn the basics of value investing. That too has worked well. Even in tumultuous times, a diversified portfolio of profitable companies that pay a dividend supported by a reasonable cash flow seem to do OK, but I am at that point on the learning curve where considerable effort is not increasing my knowledge as quickly as in the past.

Here is where the analogy with technology begins to break down. There is a point when practicing piano, a martial art, or dance where the student sees very little progress, even given a great deal of effort. Continuing to practice even when there is no discernable improvement is often the ingredient that separates the run of the mill journeyman from the master.

I will continue in the practice of frugality. After all it is the engine that generates the money I use to build my portfolio. From time to time I am tempted to increase my holdings with borrowed money, but that is dangerous. I know a brilliant entrepreneur who was once had a net worth somewhere in excess of $50 Million. In the recent Real Estate crash he lost more money than perhaps a hundred ordinary people might earn in 20 years because he was playing with borrowed money. Today he is fighting a serious cash flow problem, trying to hold on to what is left of his properties. He can’t sell them because he owes more than they are worth. It is the problem that roughly a third of American homeowners face, multiplied by a thousand.

I will continue to manage my investments to the best of my abilities. I will also continue to study, hoping to find something to jump my performance to another level. If I find it, I will share with you my readers.

Monday, January 16, 2012

Death Debt Collection

Death debt collection, a new low for a despicable business. I put off writing this one for almost two months because I just couldn’t wrap my arms around the concept of debt collection agencies harassing the surviving relatives of the dead, in order to get them to pay what they do not owe. If a person takes out a credit card or a mortgage is his or her own name and then dies before the bill is paid, the surviving relatives including the spouse owe nothing. If the credit card or the mortgage is in both names, the surviving spouse is on the hook.

Older Americans are carrying more debt than in the past, much of it associated with costly medical procedures. To the hospitals’ credit, they rarely dun the survivors of their dead, former patients. However, the major banks that issue the credit cards have no such scruples. They hire the work out to third parties to shelter their names from a public opinion backlash. An article from the Wall Street Journal, “For the Families of Some Debtors, Death Offers No Respite,” notes, “Tony Lloyd, a former manager for debt collector DCM Services LLC of Minneapolis, says the benefits of using death-debt collectors are clear. "The big selling point is that these collectors offer banks a cushion that shields them from actually having to do the gritty work of going after dead people's families,"

These people, I use the term loosely, state that the survivors have a moral duty to pay the debts of the dead since they may have benefited from those credit card purchases. They also contend they are only working in the interest of older Americans. If they don’t do this work, then older Americans couldn’t get credit. Baloney, banks are very sophisticated in their understanding of their clients’ ability to pay off their credit cards. Sometimes they just make a mistake. Don’t worry about the banks, while they can not predict which individual customer will die with an unpaid balance. They have a pretty good idea of how many clients will die and what their total unpaid balance might be. That information is factored into the interest rate charged by the bank. From Wikipedia, “Actuarial science is the discipline that applies mathematical and statistical methods to assess risk in the insurance and finance industries. Actuaries are professionals who are qualified in this field through education and experience. In many countries, actuaries must demonstrate their competence by passing a series of rigorous professional examinations.”

The Wall Street Journal, recounts the story of one poor widow who received up to ten phone calls a day from West Asset Management of Omaha, Nebraska, harassing her into paying off her dead husband’s credit card so she could get them “taken off your plate.” Disgusting, and these were some of the better examples of this sort of slime. According to the article, at least they told her she was not legally obliged to pay. The article also recounts the story of a daughter who has received roughly 200 phone calls from one of these agencies following her mother’s death.

Many of these companies misrepresent the nature of the obligation. If they do this, you can sue them.

Nobody knows how big the death debt collection has grown, but it is big and getting bigger. One company, DCM Services that exclusively collects deceased debts says it manages over $1 Billion in deceased accounts PER YEAR! The Wall Street Journal notes, “Typically, death-debt collectors get paid based on the amount of money they recoup for the lenders, say lawyers for debt-collection firms. Firms can pocket up to 40% of the payments collected, roughly double the rate for other kinds of delinquent consumer obligations.” Fortunately, as these vultures grow in number they are attracting the interest of the Federal Trade Commission and consumers rights attorneys.

These companies are building huge data bases of information from obituaries then cross referencing it to information from the banks. They are coming after the surviving relatives and even the friends of the dead, using a sophisticated, psychologically effective mix of harassment, guilt manipulation, and even what these wretches term, “empathetic active recovery,” a sort of a disingenuous form of grief counseling. If these scum come after you and they are not violating the law, which is way too permissive, there isn’t very much you can do. In dealing with these contemptible people, Dave Ramsey recommends recording all telephone conversations after identifying yourself and telling the agent the conversation is going to be recorded. If they are abusive or threatening, hang up. He recommends setting a time; say every two weeks, to talk to these people. If they call more often than that, just hang up. If they break the law and you have a recording of the conversation there is a good chance just playing it for the legal department of the collection agency will make the problem go away. If not, it might be time to talk to a consumer rights attorneys.

Saturday, January 14, 2012

Conflicts of Interest

The other day on CNN I heard a debate between Suze Orman and another personal finance guru on the merits of using prepaid debit cards or cash. The target audience were the most vulnerable Americans, people who don’t have enough money to open a bank account. I was surprised that Suze was promoting debit cards.

I have reviewed prepaid debit cards in a previous article, concluding that the best cards, such as the one issued by Walmart were acceptable substitutes for a bank account for the poorest Americans. However, I noted that most prepaid debit cards were loaded with exploitive fees. Believe it or not in some states unemployment benefits are issued in prepaid debit cards that charge fees. In Oregon, these fees include a $1.50 ATM fee, $3.00 bank teller fee, and a $17.50 overdraft fee. Depending on the state there are additional fees for using the card for a phone purchase, checking your balance, account statements, replacement cards, the list is endless. The banks have even found a way to exploit the unemployed.

The oldest and strictest method of budgeting is the tried and true envelope system. A family creates a bundle of envelopes. Each envelope has a name, food, rent, clothing, whatever the family needs to purchase. When each paycheck is cashed the money is divided up and placed into the various envelopes. If there is money in the envelope it can be spent for that intended purpose and no other. If there is no money in the envelope it cannot be spent. Pretty simple. Why would Suze be pitching a product that comes with fees and does not offer the simple discipline of the envelope system?

Well, I found the answer on the Internet. She is issuing the Suze Orman Approved prepaid MasterCard debit card, hmmm. To be fair to Suze, it is a pretty good product. Its low fees are comparable to the Walmart card. Since Suze is more focused on credit ratings than some personal finance guru, she even offers her debit card customers free credit reports from the smaller rating agency, TransUnion.

Personal Finance spiritual guides like Suze Orman are sometimes nearly worshiped by their followers who are desperate to find a way out of their financial miseries. I would hope such leaders would hold themselves to the highest possible standards, avoiding even the appearance of a conflict of interest. While I have no problem with celebrity financial teachers selling books, videos, or recording tools, I am uncomfortable when they are pitching financial products that are in direct competition with products they review. This particular instance is complicated by the relationship Suze has with CNBC. She has a show on CNBC, a network that advertizes financial institutions and their products.

From what I have read the Suze Orman Approved prepaid debit card is one of the best of the breed. I still think a family that would need such a card would be better served by the envelope system, except for the infrequent use of a prepaid debit card for Internet or phone purchases. There is nothing illegal in a celebrity offering her followers an endorsed product, but in this case, I wish she hadn’t done it.

Friday, January 13, 2012

Hot Shot!

One of my favorite oft repeated words of advice is, “Buy things that pay you to own them. Don’t buy things that cost you money to own.” This is usually followed by a harangue about cell phones, cable TV service, and the like or encouragement to invest in stocks, bonds, and income producing property.

Yesterday I heard a story about a young man who magically turned something that cost him money to own into something that paid him a salary. This young man lives in Pennsylvania, somewhere North of Williamsport, in the heart of the natural gas boom. Like many young men living in rural America he owned a pretty nice late model pickup truck that came complete with monthly payments not to mention all the other expenses associated with owning a vehicle. He heard that the gas exploration companies were hiring “hot shot” truckers at over $100 per hour, so he went down to the local Ford dealer and traded in his truck for a Ford F350 Super Duty commercial pickup truck, a vehicle powerful enough to pull the 30 foot flatbed trailers used in this line of work.

Hot shot trucking requires a driver who can respond instantly to a customer’s needs at any hour of the day or night. The driver goes to the well site, or wherever. The customer hooks a preloaded 30 foot flatbed to the truck then sends the driver off to wherever the drilling equipment is needed. At delivery, the customer unhooks his trailer and sends the driver on his way. The driver needs to be willing to work crazy hours. Since time is really money in the oil and gas business, schedule is everything. That said, a young man with no education and a driver’s license can earn over $100,000 a year—easy.

This young man actually did even better. He had an accountant shelter his truck in a corporation. Now all the expenses of owning the vehicle are tax write offs. I don’t know how long the natural gas boom will last, but at least one young man is earning a very good living. More importantly, he has learned how to create and run a wealth producing tax paying business, lessons that will serve him well for the rest of his life.

Saturday, January 7, 2012

Another Starbucks Post

Suze Orman has already whipped this dead horse enough, but here goes one more study on what a Starbucks habit really costs. Obviously, the same logic applies to cigarettes, lunch at the cafeteria, or whatever your particular convenience vice might be. The occasion is a recent price increase by Starbucks. It has been announced that in the New York area the cost of a “tall” which means the smallest cup they sell went from $1.91 to $2.01. It is expected that the cost of a large latte will exceed $4.00, not including tip.

My employer does not supply us with coffee. Instead a group of employees band together and form what is called a “coffee mess.” We buy our own coffee, supplies, and machines. Our primary machine is a standard Bunn commercial drip type coffee maker such as one sees at restaurants all over the country. We buy Dunkin Donuts, Starbucks, and similar mid-premium brands of coffee from Costco. Occasionally someone brings back a bag of super premium coffee from a trip to share with his coworkers. We charge 25 cents a cup, any size, the typical personal coffee cup runs about 10oz, and we turn a profit. Think about that—we make a profit charging 25 cents a cup.

We charge $3.20 a gallon for Starbucks coffee and we make a profit.

Starbucks is charging you $21.44 a gallon for plain old black coffee.

Coffee math from “What Your Starbucks Habit Really Costs You” by Kathy Kristof

“If you buy one $4 latte each day, that coffee habit will set you back $28 a week, about $120 a month and $1,460 per year. Keep that up for five years, and you've slurped away $7,300, not including any money you might have earned by investing your cash instead. If you account for missed investment returns, the loss amounts to roughly $9,300 (assuming a 9% average return).

After 10 years, your Starbucks habit costs you a car. After 30 years, the $239,891 that you drank away (including investment returns), could have bought a house. Over 40 years, the Starbucks habit could reduce your retirement nest-egg by an astounding $634,428 -- enough to generate an income of more than $2,600 a month.”

I’m not sure where she is getting a guaranteed 9% on her coffee money over the next 40 years but I think you get the idea. Little changes in your behavior can reap enormous rewards over time.

Monday, January 2, 2012

Does Machine Have Buddha Nature?

There are some posts that seem so obvious as to be unnecessary, but perhaps that is not the case. This morning I read a thoroughly aggravating article in USA Today entitled, “Why You Don’t Really Have Free Will” written by Jerry A. Coyne, a professor in the Department of Ecology and Evolution at The University of Chicago. He is pitching a sort of a biological and environmental determinism that I am not buying.

Coyne is writing in the tradition of proponents of Strong Artificial Intelligence (AI) who believe that man (or any biological machine) is a behavior programmed "meat machine" (stated by Marvin Minsky) in The Society of the Mind. He believes that biological intelligence is fundamentally no different than machine intelligence. Minsky, for example, considers emotions nothing but short term attention focusers. Freud discussed censors and suppressors as psychological functions that stop us from committing socially unacceptable actions. In arguments in favor of the Strong AI position the neurotransmitters (chemicals that pass information between neurons) are considered a sort of programming. This reduces our emotions to mere chemical reactions, something no more "intelligent" than the electronic manipulations performed on a computer chip by a computer program.

Machines are no more than the sum of their parts. Humans, indeed animals, are capable of transcending their molecular and environmental limitations. I believe I can change my financial condition through better decisions based on more information, the good sense given to us by God, experience, and Grace. That is a basic assumption of this blog. You can improve your situation or make it worse through your own free will decision making capacity. Somewhere C.S. Lewis said words to the effect that, “Real life is meaning. Real life is awareness.” That is my bias.

To give a clear example of my point (that machines can never be considered intelligent since they cannot exceed the sum of their parts while humans do exceed the sum of their components and experiences) I have chosen a quote from Joseph Campbell's book Transformations of Myth Through Time. "When the Buddha achieved illumination that night he was so stunned that he sat for seven days in one place without moving. This is being utterly removed from the field of time. Then he got up and walked seven paces back and stood for seven days looking at the place where he had been sitting. This is relating the temporal to the immovable realization. Then for seven days he walked back and forth between the two places relating and integrating. He then sat down under another tree and his first thought was, This can not be taught."

Humans are capable of thought processes that simply have no machine analogue. In even more simple terms; we had a hairy, spoiled, little dog. Even this creature was more than a stimulus response machine. He clearly had a mind, will and emotions of his own. In spite of my efforts to "program" him he persisted in perusing his own agenda. A machine does not have fits of jealousy or fear nor does it do things that it was not designed or programmed to do or suffer from desire, fulfillment or regret. I do and at least to some degree so did my wife's animated fur ball.

Now get out there take responsibility for your actions and do something to improve your life.

John 8

[31] Then said Jesus to those Jews which believed on him, If ye continue in my word, then are ye my disciples indeed;
[32] And ye shall know the truth, and the truth shall make you free.
[33] They answered him, We be Abraham's seed, and were never in bondage to any man: how sayest thou, Ye shall be made free?
[34] Jesus answered them, Verily, verily, I say unto you, Whosoever committeth sin is the servant of sin.
[35] And the servant abideth not in the house for ever: but the Son abideth ever.
[36] If the Son therefore shall make you free, ye shall be free indeed.

Sunday, January 1, 2012

Only 5 Things Can be Done With Money

I keep my financial records in old fashioned three ring notebooks. Every year I go out and buy a new one and a package of tab sheets to the store the record of what I am doing with my money. What is in these notebooks plus what you will find in my check registers would be sufficient to give you a very good picture of who I am and how I choose to live my life.

First of all I am the kind of guy who keeps his records in chronologically ordered three ring notebooks. That will tell you I am organized and hopelessly old school. If I lived in the 21st century, I would be using my computer to store this data. What would your record keeping methods tell me about you? Is it a big disorganized mess? Is your checkbook balanced? Do you keep a detailed Excel spreadsheet with explanatory notes?

There are really only five things we can do with our money. If we look at our records, if we have records, with honesty we will be given a great deal of insight as to who we are and how we choose to live our life. Do you like your self portrait?

1) How do you earn your money?

This is the obvious one that everyone notices. We are all guilty of comparing ourselves to others. He has a better job than I do. I earn more money than he does. I want my daughter to marry a nice doctor. The list is endless. “Do I have a job?” is both a serious and important question in this economy. The second question is, “Do I like my job?” Ultimately it is better to be happy with how you spend your working life. Sometimes, in order to earn enough money to support your family compromises are required, but still it is better if you find a way to monetize your life’s passion.

2) How do you spend your money?

Pull out that check register, or debit card record, or keep track of that cash you spend every day. Where is it going? If someone looked at your records, who would they see? THEY are looking at your record. Perhaps you should spend some time examining yourself. The credit bureaus and the great corporations know where your money is going, shouldn’t you? We all know about credit scores, but did you know that Sam’s Club is timing the coupons it sends you to match your buying patterns? If you buy 3 giant boxes of breakfast cereal this week, they will wait a while before sending you a breakfast cereal coupon. Do you spend money you don’t have on things you don’t need? Just asking.

3) How do you save your money?

In order to have financial freedom of action, it is necessary to save money. It is the first step towards wealth. What percentage of your after tax income goes into savings? Pay yourself 10% first is a common recommendation. Before you pay any bills or buy anything, put 10% in a savings account or a money market fund. Hard to do? Maybe you should spend a little less. If you are driving hard toward an important goal, that savings number might be a lot higher than 10%. Imagine, a 15 year old boy saving to buy his first car. His savings are focused on a goal.

4) How do you invest your money?

When there is sufficient money in your savings account, where does it go? Consider investment as buying something that pays you money to own it. The other extreme are things like cars and cell phones that cost you money to own. Are you a buy and hold investor? Are you a disciplined trader? Do you like to go bottom fishing, looking for bargain priced stocks and bonds or do you believe the trend is your friend? Both approaches are totally valid. Do you bury gold coins in the woods instead of storing them in a safety deposit box? Perhaps you fear the future devaluation of our currency and another government confiscation of privately held gold? If you are investing in gasoline, shotgun shells, and canned food I suspect you are preparing for the Road Warrior scenario. Do you have anything that is paying you money to own it? If you have investments, what kind of investments do you own?

5) How do you give your money?

How much money do you give away? Where does it go? The Old Testament standard was 10% to the temple for the works of God and the support of his ministers. In this new Dispensation of Freedom and Grace, how much of your income did you give to charitable works? What kind of charities and ministries did you support? How did you prioritize the distribution of these funds? Your giving will tell a lot about who you are and what you really value in this world and the world to come.